Not just Brexit is an odyssey

On the London Metal Exchange (LME) during the past weeks, the nickel price has moved within a very tight range between USD 12,900.00/mt and USD 13,400.00/mt. Overall the sideways movement showed a slight tendency on the upside. This is also reflected in the 10, 30 and 100 day moving averages which are all moving upwards. Most recently, the slower 100 day average turned upwards in the middle of February. After the high of USD 13,765.00/mt the market has calmed down a little which, in the interests of sustainability, can only be welcomed. Extreme swings or rapid rises have a tendency to move in the opposite direction in the medium and long term, leading to corrections and losses which are just as surprising, until markets can then eventually normalise.

LME nickel warehouse stocks continue to fall which optically at least, makes for good market support. The level is now at 179,328 tons. Let us remind ourselves that warehouse tonnage in June 2015 was still more than 470,000 tons. Since then nickel stocks have been falling. We have alluded to problems before about analysing this, because of visible and invisible stocks. For example, LME copper stocks at 197,550 tons have been low for quite some time if a comparison is made to the daily global consumption. Based on this, there would only be coverage lasting for less than 3 days. However, in reality, there is no physical shortage due to stockpiling and the supply chain which exists outside of metal exchanges.

Yet, a distinct change in trend can certainly be said of the nickel market, which, for years had been characterised by a structural surplus in supply. This is being successively depleted. For some time now a supply deficit, or otherwise expressed, an excess in demand, has been in existence. This is obviously a reason for the regular reductions. However, rising nickel prices and the quick end of the price model odyssey in scrap are certainly capable of bringing about an improvement in the supply situation in nickel, whether in the form of nickel pig iron (NPI) because of profitable production, or through a generally higher availability of scrap.

Yet it should not be forgotten that stainless steel production and also nickel demand from other areas are increasing, and the development of stainless steel production in Indonesia has, in the meantime, created a new serious consumer. And, indeed, this is not only for nickel and NPI but also for scrap. Unlike Homer’s Odyssey in the Iliad, this odyssey lasted less than ten years before coming back to the solid ground of reality.

“To err is human” is a well-known phrase. But is there now a culture of deliberate mistakes? This question is apt at the moment with Brexit in the UK. Citizens, nurturing a healthy scepticism and a cultivated resentment of the EU, have sent a mainly pro-EU Parliament and pro-EU government on an odyssey where the outcome is still very unclear. For some time now, both government and parliamentarians have been trying to find a way out of the dilemma, but without success. They have to actually try to reconcile all the different strands of various groups all at the same time, which de facto is an impossibility.

With the exception of a few hardliners, the majority of UK citizens has become weary of Brexit and is, to a certain extent, embarrassed about how matters are being dealt with in Parliament, at the foundation of democracy. To save face, great efforts are being made to avoid the simple question being put back to the people in a new referendum. Even if the fear of trivialising referendums may certainly be understandable, a new referendum would probably be worth it in order to solve the political crisis gracefully.

Despite differing opinions, parliamentarians, first and foremost, of course still feel themselves obliged to follow the will of the majority of voters, yet on the other hand, want to protect the Kingdom from economic damage. This puts them in a difficult situation and all the options put forward so far, from a soft to an extremely hard Brexit have not found full consensus, which also shows that the question of an exit from the EU cannot be answered with just a yes or no, as, actually, the how plays a more important role.

At the time, this was neither discussed nor even voted on. In order to keep within some kind of time frame now, and have some sort of control over events – and the remaining members of the EU have also a right to be taken into account – the question of the exit should once more be put to the people, and without any delay. And why not? Voters had given parliamentarians an impossible task to solve, so now they should be given the chance to sort the mess out themselves. If Parliament can vote four times on the same “deal”, then surely the people can too. Judging from the present mood, it is not to be ignored that the vote, at the time, was based on mistakes, misjudgements and false statements. And so the people, as autonomous individuals, should be given the opportunity to change their own mind. After all, mistakes are human.

In the case of a second referendum, each voter would be unmistakeably clear about what is now at stake. Voting would be after serious deliberation and the question put to the people in a fair and just manner. Should voters once again call for an immediate exit, then parliamentarians should recognise this as a reality and put this into action straight away. And without any ifs and buts, even if this means without a deal. This does not mean that agreements cannot be made later, or that in decades to come a renewal of membership should not be excluded, but exit must, in the first instance, mean exit. A case of having one’s cake and eating it too cannot continue.

Of course, the LME has already made preparations in the case of Brexit. And, according to Chief Executive Officer, Chamberlain, independent of the type of exit, even a hard Brexit. The first goal was, without consideration of personal preference or conviction of the Brexit question, to secure the unconditional functional ability of the LME for members and customers. To achieve this, there have been two matters to resolve. One is to obtain a trade licence for all EU states where members of the Exchange are domiciled, and the other to obtain approval as clearing house for transactions.

To this end, talks are already taking place with the European financial markets authority, ESMA, to obtain a third country status in order to permit the already granted clearing for Exchange members via London. A recognition of equal standing for the Exchange is also desired, although this is seen more as “nice to have” rather than as an absolute requirement. In the same way as the LME is making preparations, members of the exchange who are based in London, such as brokers, are also preparing for a frictionless continuation of serving clients based in EU states, even in the case of a hard Brexit. Various strategies are emerging, from the founding of a European branch to a “reverse solicitation”.

If company heads are asked about their strategies for protection against currency and commodity price swings, the natural hedge is often mentioned. For example, products for local markets are produced locally. If there is a potential devaluation of a foreign currency, the turnover may indeed be reduced in this one currency zone, but this is then also combined with a reduction in local costs (e.g. labour costs). Also, foreign currency loans can be applied to align assets and liabilities of a local subsidiary.  However, in hedging stainless steel the devil is in the detail as Michael Lockwood, principal of “The Metals Risk Team” recently wrote in an article about this topic.

The price for stainless steel is, in the end, a formula and is comprised of average nickel prices from previous time periods. Professionals talk of an alloy surcharge. In times of rising commodity prices, purchasers of stainless steel increase the volume in expectation of profiting from lower historical prices and a lower surcharge. The reverse happens in falling prices. The alloy surcharge is, after all, a self-enforcing mechanism. Moreover, nickel purchases for stainless steel production are in accordance with production needs. Stainless steel sales by producers, however, depend on market demand. Demand and production are, therefore, in certain ways disconnected from one another. On top of this, because old stock has to be used first (first in first out) it takes a few months before market movements are actually reflected in results. For these reasons, hedging of stainless steel does become a complex matter.

The global stainless steel production volume for the whole of 2018 was published by the International Stainless Steel Forum (ISSF) in the middle of March. A total of 50.7 million tons stainless steel was produced, a rise of 5.5% from the year before. The European market saw a stagnating growth of 0.1%. The biggest growth, though ultimately still very small, was attributed to the region “other” with 35.9% (5.6 after 4.1 million tons in the previous year). Although no further comment was made about this in the publication, it can allude to the increase of stainless steel production sites in Indonesia.

In a report made by Reuters, Thomas Lembong, Head of the Indonesian Investment Coordinating Board, announced at the end of March, that the nickel processing industry could even become the country’s second biggest exporter within the next ten to fifteen years. So it can be concluded that the highly ambitioned growth of stainless steel production in Indonesia will continue. The most important export goods of Indonesia at the moment are crude oil (about 42 billion USD p.a.), followed by palm oil (about 20 billion USD p.a.) and electronic equipment (about 9 billion USD p.a.).

Whilst in some aspiring economic nations economic growth is at the cost of the environment, the European Commission has issued another EU regulation for the implementation of due diligence obligations in the supply chain of tin, tantalum, tungsten and gold from conflict and high risk areas (EU regulation 2019/429). This is to ensure that companies do not import commodities from suppliers who are in violation of human rights. The regulation reflects a code of conduct set by the United Nations for business and human rights. Origins of this are from 1952, when the United Nations Security Council demanded a resolution to fulfil the due diligence obligation in supply chains, especially in regard to the “Democratic” Republic of Congo and its neighbours in Central Africa. This was to prevent war lords being financed by business. In this connection, even in social dimensions, the sustainable commodity, scrap, can be seen in a different light.

The benchmark for deliveries of charge and high-carbon ferrochrome to Europe has risen slightly for the 2nd quarter of 2019. This is agreed traditionally between a leading South African ferrochrome producer and one of the biggest European stainless steel producers each quarter. The benchmark for January to March 2019 was USD 1.12 per pound, but now is at USD 1.20 per pound, an increase of 8 USD cents, or a rise of 7.1% over the previous quarter. The benchmark is, however, only used as a point of reference for the market. Actual trading prices are usually lower.